Need a robust fiscal response

By: |
June 02, 2021 6:00 AM

FY22 growth markdowns will mask deeper loss of incomes, with vaccine rollout key to sustained revival

Moody's said NLPs will form more quickly in second wave than during the first wave, with loans to self-employed individuals along with SME loans, being the most susceptible to deterioration.

The second official revision of FY21 GDP growth showed a moderate improvement from the full-FY21 estimate, from a projected 8.0%-contraction to a contraction of 7.3%), with strong activity in Q4. These revisions will have implications for our FY22 forecasts.

The second-wave of Covid-19 is showing signs of subsiding (although there is a persistent stickiness in the lower numbers of infections), resulting in graded relaxations of lockdowns in some urban agglomerations in major states, but there are significant risks. A robust vaccination-rollout is still probably a couple of months away, and rising travel with the easing of restrictions might lead to infection surges—at least localised, if not a third wave.

Hence, the prospects of an economic recovery remain uncertain, at least till Q2FY22. Our forecast for FY22 real GDP growth is 9.8%, down from 11.8% in March 2021 (pre-second wave). Obviously, this is an evolving target. A more prudent outlook, instead of this point-forecast, is a range of possible growths in a 9.0-10.5% band, with a 60% probability of FY22 growth being 9.5-10%.

This encompasses both the duration and intensity of the current lockdowns (continuing into June 2021). In comparison, the forecasts of the three large global ratings agencies range from 9.3-9.8%. The first official estimate from the National Statistical Office for full-FY22 will only be available in January 2022, with the estimates for Q1 released in August. RBI’s growth outlook in its Annual Report indicates that the forthcoming MPC meet will only marginally cut its FY22 forecast from the earlier 10.5%.

The problem is the likely loss in incomes and reduced economic activity will be much greater than suggested by the GDP numbers. The initial forecasts are significantly based on the quarterly financial results of a set of around 3,000 public listed companies, and it is only later revisions that progressively capture operating conditions of smaller companies, particularly the micro and small enterprises.

Already, various surveys and representations from industry associations of services-oriented segments hit by the new lockdowns suggest a significant number of businesses have been permanently closed, or are severely stressed. Despite the lower intensity of lockdowns, this is the second shock to activity in two consecutive years, which has reportedly led to a severe depletion of savings and access to informal funds from relatives and friends. The high cost of medical care in private facilities has also impacted savings of even middle-income families.

Significant rollout of vaccinations will take at least another couple of months. The public health experience of the second wave will deter unvaccinated people from resuming social activity, unlike during the 2020 festival season. While the monsoon is forecast to be very favourable this year, the spread of Covid infections to Tier 4 and 5 towns and rural areas is creating uncertainty. CMIE data on unemployment shows a significant rise in both rural and urban areas. All this suggests that revival from pent up demand will be much more subdued this year, with households having run out of savings.

But much of this concern about the recovery prospects of small and micro businesses is anecdotal, in the absence of formal data. A look at some past data from the larger set of companies might serve as proxy for the actual scarring, the loss of incomes. First, as a counter-factual, India is likely to have permanently lost about Rs 50-60 lakh crore of potential nominal incomes over FY20 to FY22, relative to where FY22 nominal GDP would have been in the absence of the Covid-related disruptions.

Second, to get an approximate sense of the asymmetry in performance across larger, medium and smaller companies, we segmented a set of about 1,900 non-finance companies whose 3QFY21 results by sales are available (the largest with sales greater than Rs 250 crore in Q2, the smallest less than Rs 5 crore and multiple segments in between). The results are not surprising. Sales growth follow an ordinal drop in magnitude as do profits and employee expenses.

Third, data available till FY19 from the corporate affairs ministry’s MCA-21 gives an idea of the scale of the problem during FY21 and FY22. Sales of 3,200 listed public limited companies in that year were Rs 39 lakh crores (lc), salaries paid Rs 4 lc with operating profits of Rs 5.8 lc. In comparison, the corresponding numbers for about 13,000 unlisted public limited companies were Rs 17.3 lc, Rs53,000 crore and Rs 1.8 lc. For the set of 2.3 lakh private limited companies, these numbers were Rs 34.5 lc, Rs 2.6 lc and Rs 2.1 lc, respectively. In FY16, the NSSO Survey of Unincorporated Enterprises had estimated the number of enterprises at 6.3 crore, in contrast to 2.9 lakh private limited companies! The minuscule magnitude of the scale of the vast majority of enterprises in India is quite startling. Remember, even before the trends accelerated post the pandemic, there was already a process of consolidation towards larger companies, aggravating the disparities.

In the absence of a more felicitous phrase, the “good” news is that the impact among the smaller enterprises will be of a lower magnitude, but this loss will be spread out over a large number of businesses and enterprises, and hence consumers, with a significant impact on demand. And therein lies the need for a robust fiscal response.

Executive VP and chief economist, Axis Bank
Views are personal

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